As EUR/USD price action holds below the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-90, a corrective retracement could unfold in the days ahead as the rally from the September remains overbought, and the daily relative strength index should fall back below 70 this week if we see the exchange rate work its way back towards the 50.0% Fib around 1.3500. The euro-dollar showed little reaction to the Sentix survey even though the report showed investor confidence increased to a three-year high of 8.8 in October from 7.6 in the previous month, and shift in market sentiment could drive the exchange rate lower throughout the day as risk trends continue to dictate price action in the currency market. However, if the euro-dollar is able to find short-term support around the 50.0% Fib, there could be a phase of consolidation over the coming weeks given the uncertainties surrounding the economic outlook, and the EUR/USD may trend sideways before we see another breakout in the exchange rate.

Meanwhile, Ireland’s central bank lowered its growth forecast for the region and expects GDP to expand 0.2% this year amid an initial forecast for a 0.8% rise, while the growth rate is anticipated to increase 2.4% next year versus earlier projections for a 2.8% expansion. The central bank went onto say that the recovery in Europe remains “uneven” as the rebound in economic activity appears to be tapering off in the second-half of the year, and went onto say that the outlook remains clouded by high uncertainties as the governments operating under the single-currency struggles to manage their public finances. In addition, the economic docket showed producer prices in the Euro-Zone increased at an annual pace of 3.6% in August after expanding 4.0% in the previous month, and the slower pace of inflation paired with the slowing recovery could lead the Governing Council to maintain a dovish policy stance going into 2011 as it aims to balance the risks for the region.

The British Pound bounced back from a low of 1.5748 during the European trade as U.K. policy makers held an improved outlook for the region, but the GBP/USD is likely to trade within the narrow range carried over from the previous week as price action struggles to hold above 1.5900. Chancellor of the Exchequer George Osborne said the economy has “moved out of the danger zone” during an interview with BBC Radio, while former Bank of England Deputy Governor John Gieve talked down speculation for a further expansion in quantitative easing and said interest rates will have to rise going forward according to an article in the Guardian newspaper. As investors mull over the outlook for future policy, the GBP/USD is likely to hold steady ahead of the BoE interest rate decision later this week, but the central bank may refrain for releasing a policy statement like we’ve seen for the past few months.

The greenback bounced back against most of its major counterparts, with the USD/JPY rallying to a high of 83.86 overnight, but the dollar is likely to face increased volatility later today as the economic docket is expected to reinforce a mixed outlook for the world’s largest economy. Pending home sales in the U.S. is forecasted to increase 0.9% in August following the record 20.1% drop in the previous month, while factory orders are projected to fall 0.4% during the same period after tipping 0.1% in July. In addition, Fed Chairman Bernanke is scheduled to speak regarding the economy later today, and comments from the central bank head could shake up the majors as investors weigh the prospects for future policy.

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